Sale with a right of return in IFRS 15
Under IFRS 15 Revenue from contract with customers, when an entity makes a sale with a right of return it recognises revenue at the amount to which it expects to be entitled by applying the variable consideration and constraint guidance set out in Step 3 of the model (see Step 3 Determine the transaction price). The entity also recognises a refund liability and an asset for any goods or services that it expects to be returned.
- An entity applies the accounting guidance for a sale with a right of return when a customer has a right to:
a full or partial refund of any consideration paid;
- a credit that can be applied against amounts owed, or that will be owed, to the entity; or
- another product in exchange (unless it is another product of the same type, quality, condition and price – e.g. exchanging a red sweater for a white sweater). [IFRS 15.B20]
In addition to product returns, the guidance also applies to services that are provided subject to a refund.
The guidance does not apply to:
- exchanges by customers of one product for another of the same type, quality, condition and price; and
- returns of faulty goods or replacements, which are instead evaluated under the guidance on warranties. [IFRS 15.B26–B27]
When an entity makes a sale with a right of return, it initially recognises the following: [IFRS 15.B21, B23, B25]
|Revenue||Measured at the gross transaction price, less the expected level of returns calculated using the guidance on estimating variable consideration and the constraint (see Constraints and variable consideration)|
|Refund liability||Measured at the expected level of returns – i.e. the difference between the cash or receivable amount and the revenue as measured above
The nature of such a refund liability is different from contract liabilities and therefore it is not presented as such
|Return asset||Measured with reference to the carrying amount of the products expected to be returned less the expected recovery costs, including potential decreases in the value to the entity of returned products
The nature of this return asset is different from trade and other receivables and therefore it is not presented as such
|Cost of goods sold||Measured as the carrying amount of the products sold less the return asset as measured above|
|Reduction of inventory||Measured as the carrying amount of the products transferred to the customer|
The entity updates its measurement of the refund liability and return asset at each reporting date for changes in expectations about the amount of the refunds. It recognises adjustments to the:
- refund liability as revenue; and
- return asset as an expense. [IFRS 15.B24–B25]
Worked example – Sale with a right of return
Retailer B sells 100 products at a price of 100 each and receives a payment of 10,000. The sales contract allows the customer to return any undamaged products within 30 days and receive a full refund in cash. The cost of each product is 60. B estimates that three products will be returned and a subsequent change in the estimate will not result in a significant revenue reversal.
B estimates that the costs of recovering the products will not be significant and expects that the products can be resold at a profit.
Within 30 days, two products are returned.
B records the following entries on:
The measurement of a refund liability reflects the amount expected to be refunded to the customer. Therefore, when a right of return allows the customer to return a product for a partial refund (e.g. 95 percent of the sales price), the refund liability (and the corresponding change in the transaction price) is measured based on the portion of the transaction price expected to be refunded. For example, this would be the number of products expected to be returned multiplied by 95 percent of the selling price.
Restocking fees and costs
An entity sometimes charges a customer a restocking fee when a product is returned. The restocking fee is generally intended to compensate the entity for costs associated with the product return (e.g. shipping and repacking costs) or the reduction in the selling price that an entity may achieve when reselling the product to another customer.
A right of return with a restocking fee is similar to a right of return for a partial refund. Therefore, a restocking fee is included as part of the estimated transaction price when control transfers – i.e. the refund liability is based on the transaction price less the restocking fee.
Similarly, the entity’s expected costs related to restocking are reflected in the measurement of the return asset when control of the product transfers. This is consistent with the guidance in the standard that any expected costs to recover returned products should be included by reducing the carrying amount of the return asset recorded for the right to recover those products.
For example, assume that an entity sells 20 widgets to a customer for 30 each and the cost of each widget is 15. The customer has the right to return a widget but is charged a 10% restocking fee. The entity expects to incur restocking costs of 2 per widget returned. The entity estimates returns to be 5%.
When control of the widgets transfers to the customer, the entity recognises the following.
|Reporting line||Includes recording of||Amount||Calculation|
|Revenue||Widgets not to be returned plus restocking fee||573||(19
x 30) + (1 + 3
|Refund liability||Widget expected to be returned less restocking fee||27||(1 x 30) – 3|
|Return asset||Cost of widget expected to be returned less restocking cost||13||(1 x 15) – 2|
Conditional right of return
The standard does not distinguish between conditional and unconditional rights of return and both are accounted for similarly. However, for a conditional right of return the probability that the return condition would be met is considered in determining the expected level of returns. For example, a food production company only accepts returns of its products that are past a sell-by date. Sale with a right of return
Based on historical experience, the company assesses the probability that the products will become past their sell-by date and estimates their return rate. Sale with a right of return
Historical experience may be a source of evidence for estimating returns
When estimating the amount of consideration expected to be received from a sales contract with a right of return, an entity may consider historical experience with similar contracts to make estimates and judgements. Using a group of similar transactions as a source of evidence is not itself an application of the portfolio approach (see Portfolio approach and Estimate the amount of variable consideration).
When the entity elects to estimate the transaction price using the expected value method and uses a portfolio of data to determine the expected value of an individual contract, the estimated amount might not be a possible outcome for an individual contract (see Estimate the amount of variable consideration). Because a sale with a right of return represents variable consideration, an entity is also required to apply the constraint to its estimate.
The standard includes Example 22 (IFRS 15.IE110–IE115) illustrating how to determine the transaction price for a portfolio of 100 individual sales with a right of return. In the example, the entity concludes that the contracts meet the conditions to be accounted for at a portfolio level and determines the transaction price for the portfolio using an expected value approach to estimate returns. However, as explained above the entity could achieve the same accounting outcome by using the portfolio as a source of data, rather than assessing whether the contracts meet the conditions to be accounted for at a portfolio level.
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